Imports slow second-quarter growth

By IBT Staff Reporter On 07/30/10 AT 8:40 AM

Economic growth slowed in the second quarter as a capital investment drive by businesses saw imports increasing at their fastest pace since the first quarter of 1984, a government report showed on Friday.

Gross domestic product expanded at a 2.4 percent annual rate, the Commerce Department said in its first estimate, after a revised 3.7 percent growth pace in the January-March quarter.

Analysts polled by Reuters had forecast GDP, which measures total goods and services output within U.S. borders, growing at a 2.5 percent rate in the second quarter. The government had previously estimated a 2.7 percent growth rate for the first three months of this year.

The economy, which is digging out of its longest and deepest recession since the 1930s, has now grown for four straight quarters. However, growth has been too tepid, making little impact on a high unemployment rate.

The sluggish economy and a 9.5 percent unemployment rate are eroding President Barack Obama's popularity and dimming Democrats' prospects in November's mid-term elections.

A Reuters-Ipsos poll this week showed only a 34 percent approval of Obama's handling of the economy and jobs compared to 46 percent who deemed it unsatisfactory.

This is a sharp decline from early 2009, shortly after he took office, when more than half of those surveyed approved of Obama's handling of the worst financial crisis in decades.

Growth in the last quarter was held back by 28.8 percent surge in imports, which eclipsed a 10.3 percent rise in exports. That created a trade deficit, which lopped off 2.78 percentage points from growth, the largest subtraction since the third quarter of 1982.

Outside the trade sector, however, details of the report were rather encouraging. Business investment rose at a 17 percent rate, the largest increase since the first quarter of 2006, after a 7.8 percent pace during the prior period. Spending on equipment and software was the largest since the third quarter of 1997, while investment on structures rose for the first time since the third quarter of 2008, likely boosted by a rise in oil and gas drilling.

Growth during the second quarter was also supported by new home construction, which surged at a 27.9 percent rate after being a drag on growth in the first quarter, reflecting a spurt in building activity spurred by a popular homebuyer tax credit that has since expired. The rate of increase was the biggest since the third quarter of 1983.

Residential investment had contracted at a 12.3 percent rate in the first quarter.

But there were some areas of concern. The report showed consumer spending was not as robust as had been previously thought. Growth in consumer spending was at a 1.6 percent rate in the second quarter after increasing at a revised 1.9 percent in the first quarter.

Consumer spending, which normally accounts for 70 percent of U.S. economic activity, had previously been estimated to have grown at a 3.0 percent rate in the first quarter. Spending added 1.15 percentage points to GDP last quarter.

Business inventories increased $75.7 billion in the second quarter after a $44.1 billion rise in the first three months of the year. Inventories contributed 1.05 percentage points to GDP. Excluding inventories, the economy expanded at a 1.3 percent rate, picking up from a 1.1 percent pace in first quarter.